Bending the Third Rail
Because We Should, We Can, We Do
Monday, May 22, 2006
Ever Have a Doh Moment?
I had one today in reading Barry Ritholtz's post about inflation.

Turns out that the government measures of inflation (the so-called CPI or Consumer Price Index) contains within it a measure of housing cost based on rents. It also turns out that this measure of rents equals a whopping 30% of the total measure of costs in the CPI.

I think everyone understands that we've been going through a bit of a housing boom in the last several years. Care to guess the impact a housing boom has on rents? The "rent" measure is not the cost of mortgages.

Just rents.

A hot housing market enticing buyers, many first time buyers, into the house market has significantly depressed rents which has in turn had a huge impact on the reported inflation rates. Of course, now that housing is slowing down, rents are recovering and the inflation rates are beginning to be more reflective of the underlying economic dynamics. In other words, the underlying economic inflation rates have been depressed by the housing bubble which goes some distance in explaining the disparity between the perception on Wall Street vs. Main Street.

Look for inflation numbers, as a trend, to continue upward and for the Fed to need to continue to raise interest rates. Also be prepared for the stock market to find this a huge disappointment that causes a significant pullback through the summer.
Written at 1:10 PM by Greyhair.
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